Tuesday, June 26, 2012

Identifying High Frequency Trading Firms Footprints

MetaStock SPRS Series - Week 74 - TechniTrader® Stock Discussion for MetaStock Users - Identifying High Frequency Trading Firms Footprints - June 25, 2012
By: Martha Stokes C.M.T.

High Frequency Traders HFTs are a relatively new market participant who evolved out of the professional proprietary trading floors, who broke away from their market maker employers to embark on their own business plan. HFTs are millisecond traders who use formulas and powerful high speed computers, placed near or in the proximity of the exchanges to reduce the order latency time.

An HFT can trade in and out of a stock 60,000 times a minute. Retail traders have access only to the minute trade timeframe, therefore, how these traders move price is critical to understand.

Most of the time HFT action is a huge extraordinarily long candle, with an exhaustion pattern on volume. An exhaustion volume pattern is when the untruncated volume bar hits the top of its chart. Volume may be green or red but both represent an exhaustion of the trading activity for that stock on that day. Most of the time, this signals a change of trend or a move out of a sideways pattern.

GE has an HFT volume exhaustion pattern below. Although price did not move much on this particular stock on that day, what matters for retail traders is this huge surge of HFT activity signaled that the stock was poised to move.

Chart 1

A shift of sentiment on the TechniTrader® Quiet Accumulation TTQA indicator confirms that the sell side has lost control of price, and that an upside direction is about to commence. For swing traders in particular, these footprints are valuable indicators to recognize in charts.

Below RBC shows an HFT volume exhaustion pattern as it peaks. This time, TTQA is smaller funds chasing the HFT activity. This is a very common pattern in our markets right now. HFTs instigate a one day run and then smaller funds rush in to buy speculatively only to have the stock sell down as giant funds had already started to rotate out of the stock.

Chart 2

High Frequency Trading Firms add tremendous liquidity to the markets. Their millisecond traders pump huge surges of volume and huge gains or losses for one day. BUT their trading seldom moves price in the direction they took it in a continuing trend pattern.

Understanding how each market participant affects price can help you avoid whipsaw trades, “gottcha” stock picks, and chronic losses.

Learn to identify which market participant is in control of price at that time, and then learn what their presence means for near term price action. If you do, you will be on the right side of the trade more often and make higher consistent profits.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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